Invest
Plenty of value outside of the big end of town
While investors are naturally attracted to large caps, it’s smaller companies that offer the best value.
Plenty of value outside of the big end of town
While investors are naturally attracted to large caps, it’s smaller companies that offer the best value.
The point of investing in global equities is to exploit the full breadth of opportunities the equity universe has on offer, not to be dominated by exposure to companies whose market caps are larger than the GDP of most African nations.
The 10 largest companies in the MSCI World Index make up 11 per cent of the total index weight. This time last year, in the State Street Global Equity Fund we held none of the ten largest, but today we hold two of them. For example, some large banks have become more attractive on valuation and risk characteristics.
The 50 largest companies in the MSCI World Index, the smallest of which is US$105 billion in market cap, make up almost 30 per cent of the weight of the index. We have found eight worth investing in, amounting to around 10 per cent of the fund’s weight. Staples and healthcare have been the dominant exposures in this capitalisation segment.
The 100 largest companies make up more than 42 per cent of the market cap of the MSCI World Index, and we have found 11 companies attractive enough to include in the fund, but which only amount to 13 per cent of the fund weight. That leaves the other 87 per cent of the fund to invest in companies outside of the big brands.
What is there beyond the mega caps?
While SSGA’s expected return on the mega cap stocks as a group (the largest 100 companies) is better than average, there are still 550 companies in the universe that have a higher expected return by our estimate. It’s not about avoiding large companies, it’s about opening up the opportunity set.
Smaller companies are fertile ground for finding greater inefficiencies in the equity market. There are 55 analysts providing Bloomberg with earnings estimates for Apple Inc, but only 16 analysts covering Waste Management Inc, the 246th largest company in the benchmark universe with a market cap of US$30 billion. The opportunities to find mispriced stocks are greater when fewer market participants are scrutinising them.
Less regulation in the US under the new administration could level the playing field for smaller companies, which previously would have been disadvantaged by fewer resources to allocate to lobbying for exemptions from taxation. A new corporate tax environment could be good for smaller companies in the US.
What’s the catch? Transaction costs.
Selling one stock to buy another involves trading costs. Not just explicit costs like brokerage or GST. These costs are tiny compared with the potential market impact associated with trading if seeking to transact on a large amount of a small company.
That’s why it is so important to understand with granularity what it costs to trade, and incorporate that into the portfolio construction decision.
In fact, we consider the expected return of every company in the market and weigh that against the expected volatility impact of including that stock in the portfolio and net of the expected cost to transact that stock. We demand a higher expected return or lower risk from smaller companies to include them because they typically incur higher market impact costs when trading. We also limit the portfolio’s position in any company relative to how much trading volume of that stock regularly goes through the market to ensure we are not left with a position that cannot be sold without too much market impact incurring too high a cost.
In today’s environment where breadth in portfolios helps to insulate against extreme outcomes from concentrated positions, investing beyond mega caps is an important ingredient in the pursuit of strong risk adjusted returns through active management.
Olivia Engel, chief investment officer global active quantitative equities deputy, State Street Global Advisors
Property
RBA gives APRA’s use of macro tools a tick of approval
Ahead of an expected move to impose tougher lending rules on the banks, the Reserve Bank has looked into previous attempts by APRA to cool the housing market. ...Read more
Property
Federal incentives are driving more first home buyers into the market
While property prices continue to grow, new research suggests that the government’s current crop of first home buyer incentives is having an impact on this segment of the market. ...Read more
Property
Why it now costs 130% more to service a mortgage than 3 decades ago
The lifetime cost of owning a home has increased by over 130 per cent in just three decades, new research has revealed. ...Read more
Property
Using the 30/30/3 rule for home buying during uncertain times
Thinking of buying a home? Uncertain economic times may have you double guessing your purchase, but the 30/30/3 rule can help you make this a reality. ...Read more
Property
Rental yields reach decade high, but not all markets move at the same pace
Changing consumer preferences towards lifestyle destinations and a lack of supply have led to record national price growth, albeit price fluctuations vary region-to-region, fresh figures show. ...Read more
Property
What younger Australians are getting wrong about home loans
As young Australians look to fight the odds and take their first step onto the property ladder, more and more are making easy mistakes. ...Read more
Property
More than 1 in 3 Aussie properties are cheaper to buy than rent
Having a mortgage is even more likely to be cheaper than renting than it was pre-pandemic, new research has revealed. ...Read more
Property
How will the moratorium on evictions impact landlords and tenants?
The NSW government has announced a 60-day moratorium on evictions, with landlords gifted incentives to reduce the burden on COVID-19-affected tenants. ...Read more
The Olympic effect on property and equity investors; COVID-19 Disaster Payments and super
Listen now
Do lockdowns boost property prices? Are short-sellers levelling the playing field? Did you lodge your tax returns early?
Listen now
Will lockdowns halt the housing boom? Is the metaverse taking over? And the cons of lodging your tax returns early
Listen now
Are you being priced out of the market? Have you got the Tuesday blues? And are you ready for the upcoming super changes?
Listen now
Property
RBA gives APRA’s use of macro tools a tick of approval
Ahead of an expected move to impose tougher lending rules on the banks, the Reserve Bank has looked into previous attempts by APRA to cool the housing market. ...Read more
Property
Federal incentives are driving more first home buyers into the market
While property prices continue to grow, new research suggests that the government’s current crop of first home buyer incentives is having an impact on this segment of the market. ...Read more
Property
Why it now costs 130% more to service a mortgage than 3 decades ago
The lifetime cost of owning a home has increased by over 130 per cent in just three decades, new research has revealed. ...Read more
Property
Using the 30/30/3 rule for home buying during uncertain times
Thinking of buying a home? Uncertain economic times may have you double guessing your purchase, but the 30/30/3 rule can help you make this a reality. ...Read more
Property
Rental yields reach decade high, but not all markets move at the same pace
Changing consumer preferences towards lifestyle destinations and a lack of supply have led to record national price growth, albeit price fluctuations vary region-to-region, fresh figures show. ...Read more
Property
What younger Australians are getting wrong about home loans
As young Australians look to fight the odds and take their first step onto the property ladder, more and more are making easy mistakes. ...Read more
Property
More than 1 in 3 Aussie properties are cheaper to buy than rent
Having a mortgage is even more likely to be cheaper than renting than it was pre-pandemic, new research has revealed. ...Read more
Property
How will the moratorium on evictions impact landlords and tenants?
The NSW government has announced a 60-day moratorium on evictions, with landlords gifted incentives to reduce the burden on COVID-19-affected tenants. ...Read more
More articles
Website Notifications
Get notifications in real-time for staying up to date with content that matters to you.
